Government likely to announce spending cuts

Beleaguered government appeared poised on Friday to push ahead with measures to revive the economy after months of dithering, even as it came under heavy fire from allies and opponents alike for raising heavily subsidized fuel prices.

A Cabinet committee was due to consider a proposal to allow foreign airlines to buy shareholdings in local carriers and will also discuss selling stakes in large state-run companies such as Oil India. Another committee is due to speed up infrastructure project approvals.

Two government sources said India was likely to announce spending cuts on Saturday for the 2012/13 fiscal year to March.

India's inability in the past months to push through major reforms and ease its subsidy burden has put it in danger of becoming the first of the big "BRICS" emerging economies to see its credit rating downgraded to junk.

India's decision late on Thursday to raise diesel prices by 14 percent, the first such move in 15 months, is aimed at shoring up a weak fiscal position, but it has already come under fire from the opposition and allies within the ruling Congress party-led coalition who see a chance to hurt the government.

The measures will add to inflation in the short term, but will ultimately make it easier for the central bank to loosen monetary policy and help revive investor confidence damaged by political gridlock in New Delhi.

India's wholesale price index (WPI) rose a higher-than-expected 7.55 percent in August from a year earlier, mainly driven by higher food prices due to deficient monsoon, government data showed on Friday.

Despite the higher-than-forecast inflation figure, markets remained broadly up on positive sentiment about the diesel price increase. Mumbai's main stock index was up more than 2 percent, while the 10-year bond yield was flat on the day at 8.17 percent.

The increase diesel prices will add 60 basis points to inflation, a senior finance ministry official said on Friday. Diesel is widely used by transport companies and farmers.

"It is a bold move, and will send a strong signal to the Reserve Bank of India (RBI) on the government's efforts at fiscal consolidation," said Anubhuti Sahay, an economist at Standard Chartered Bank in Mumbai.

While most other G20 central banks are trying to ease monetary conditions to counter a global slowdown, the RBI has consistently flagged high inflation as a key risk to an economy where growth is faltering.